Explain it like I'm five
We're making insurance so simple, now even 5-year-olds can understand it.
What is depreciation?
Imagine you've just bought yourself a delicious ice cream cone.
But an ice cream is only ice cream if it's frozen, right? And even though it is perfectly frozen when you buy it, it doesn't stay that way. The forces of nature act upon it the moment you take it out of the freezer. It starts to melt.
Now suppose you want to sell your ice cream to your friend. You bought it for Rs. 100, and if you offer it to your buddy RIGHT after you bought it, it's still worth Rs. 100. But if you try to sell it 5 minutes later? It's melting! Your friend will offer you a lesser price for a melted ice cream, because its value has decreased. And the value decreases with every minute that the ice cream is out of the freezer, and the more it melts. That's depreciation!
Here’s the full scoop.
We always wish the best feelings in the world could last forever, and not melt away with time. The smell of a new book. The shine of a new car. The way your heart races a little bit as you unbox a new phone. Let’s face it…we can’t resist the excitement of something new. But that feeling goes away, doesn’t it? Give it a few weeks. New will turn to normal. And normal to old. It’s the cycle of life!
But think about it this way: one day after you unboxed your phone, or drove your car out of the shop - is it still new? How about 2 days? How new is it after 2-weeks? With each day, the ‘newness’ of your possession decreases, and with it decreases its value. And voila! We’ve arrived at ’Depreciation’.
Didn’t realize we were talking about an insurance term, right? That’s what’s awesome about our Back to Basics program! And with this lesson, we’re tackling a term that may sound big and complicated but has a really simple meaning.
Depreciation is calculated differently for different products.
How is depreciation calculated for mobiles?
- In most cases for mobile insurance, a surveyor assesses the depreciation – and the verdict is based on their opinion! This means that your depreciation isn’t set in stone, and it’s based on the assessor’s judgement.
- There is a pre-defined ‘fixed slab’ of depreciation based on the age of your product (that’s how we do things at Digit!) Since your depreciation doesn’t depend on a surveyor’s assessment, there’s less to-and-fro, making the process simple, clear and fast.
How is depreciation calculated for cars?
Depreciation for your car is calculated in 2 ways:
- Your brand-new car depreciates automatically the moment it hits the road for the first time, as it loses 5% of its Ex-showroom price. As your car ages further, it continues to depreciate based on a fixed percentage. This is known as overall depreciation, a factor that comes into play in case of total loss or theft.
- In case of partial loss of your car, the depreciation is calculated on specific parts of your car that need to be replaced. That is, 50% depreciation on the rubber parts, 30% on the fibre parts, 0% depreciation on the glass parts and a 0% to 50% depreciation on the other parts of your car (that is, the wooden and metallic parts), depending on the age of your car.
But remember, there’s a free pass on depreciation if you’ve got these 2 add-ons: RTI (Return to Invoice) and Zero Depreciation. If you have Return to Invoice it means that if your car is totally damaged or stolen, it is valued at the invoice cost without any depreciation when you make a car insurance claim.
For Example: If you are buying car insurance for a car that was purchased three years back at Rs. 5 Lakhs, the IDV or the Sum Insured of the car would be Rs. 3 lakhs after applying 40% depreciation since the insurance is bought in the 4th Year. But, if you’ve got an Return to Invoice add-on, and there is a total loss/theft, you will get a Sum Insured of 5 Lakhs which is the showroom price of the car 3 years back. You have successfully dodged depreciation!
And if you’ve got Zero Depreciation add-on it means that if your car is partially damaged, you don’t have to bear the amount being calculated for depreciation and your insurer will take care of everything!
Let’s do a quick recap!
The depreciation for different products are calculated in different ways. Your mobile’s depreciation is either based on a surveyor’s assessment, or a fixed slab percentage based on the age of your phone. So, check in with your mobile insurance company to be sure of how your phone’s depreciation is being calculated!
The depreciation for a car is based on the category of its parts and age of the car . In case of partial loss of your car, the depreciation is calculated on basis of the category of the damaged parts (i.e. for rubber & fibre) and the age of the vehicle (i.e. for wooden & metallic parts).
If you’re buying car insurance online, make sure you call your online insurance company and understand how they calculate your car’s depreciation.
With add-ons like Zero Depreciation and Return to Invoice cover, you can leave depreciation woes to your insurer. Add-ons like zero depreciation cover are the most popular because in case of partial loss, it takes a huge load off your pocket! In times of trouble with your possessions, the last thing you need is a long, scary bill, right?